Profit impact of marketing strategy

The Profit Impact of Market Strategy (PIMS) database "yields solid evidence in support of both common sense and counter-intuitive principles for gaining and sustaining competitive advantage": Tom Peters and Nancy Austin. It was developed with the intention of providing empirical evidence of which business strategies lead to success, within particular industries. Data from the study is used to craft strategies in strategic management and marketing strategy. The study identified several strategic variables that typically influence profitability. Some of the most important strategic variables studied were market share, product quality, investment intensity, and service quality, (all of which were found to be highly correlated with profitability).

According to Lancaster, Massingham and Ashford (p531, Essentials of Marketing, 4th edition, 2002, McGraw Hill), PIMS seeks to address three basic questions:

* What is the typical profit rate for each type of business?
* Given current strategies in a company, what are the future operating results likely to be?
* What strategies are likely to help improve future operating results?

Dibb, Simkin, Pride and Ferrel (p677, Marketing Concepts and Strategies, 4th European edition, 2001, Houghton Mifflin) cite six principle areas of information that PIMS holds on each business:

* characteristics of the business environment
* competitive position of the business
* structure of the production process
* how the budget is allocated
* strategic movement
* operating results.

Brief history of PIMS

The PIMS project was started by Sidney Schoeffler working at General Electric in the 1960s, then picked up by Harvard's Management Science Institute in the early 1970s, and has been administered by the American Strategic Planning Institute since 1975.

It was initiated by senior managers at GE who wanted to know why some of their business units were more profitable than the others. With the help of Sidney Schoeffler they set up a research project in which each of their strategic business units reported their performance on dozens of variables. This was then expanded to outside companies in the early 1970s.

The initial survey, between 1970 and 1983, involved 2,600 strategic business units (SBU), from 200 companies. Today 3,811 observations exist; PIMS is managed by PIMS Associates in London. Each SBU give information on the market within which they operated, the products they had brought to market and the efficacy of the strategies they had implemented.

The PIMS project analysed the data they had gathered to identify the options, problems, resources and opportunities faced by each SBU. Based on the spread of each business across different industries, it was hoped that the data could be drawn upon to provide other business, in the same industry, with empirical evidence of which strategies lead to increased profitability. The database continues to be updated and drawn upon by academics and companies today.

Conclusions drawn by PIMS

The original PIMS data survey led the PIMS project to identify 37 variables which account for the majority of business success. Two leading marketing texts differ slightly on which variables are the most important, with Dibb, Simkin, Pride and Ferrel (p676) identifying:

* a strong market position
* high quality of product
* lower costs
* lower requirement for capital investment

and Lanacaster, Massingham and Ashford (p535) citing:

* market share
* investment intensity
* market growth
* life cycle stage
* marketing expense to sales ratio.

While many of these seem obvious, PIMS has the advantage of providing empirical data that define quantitative relationships and back what some may consider to be common-sense.

Participation in the PIMS study: cost and benefits

PIMS evaluated businesses' market position and suggest possible strategies, based on the data gathered from participating companies. Businesses wishing to use the service provide detailed information, including details of their:

* competitors and market
* balance sheet
* assumptions about future sales.

In return, PIMS provides four reports, described by Lancaster, Massingham and Ashford as:

1. A 'Par' report - showing the ROI and cash flows that are 'normal' for this type of business, given its market, competition, technology, and cost structure.

2. A 'Strategy Analysis' report, which computes the predicted consequences of each of several alternative strategic actions, judged by information in similar businesses making similar moves, from a similar starting-point and in a similar business environment.

3. A 'Report on Look-Alikes' (ROLA), which aimed at predicting the best combination of strategies for that particular company, by analysing strategically similar business more closely.

4. An 'Optimus Strategy' report, which is aimed at predicting the best combination of strategies for that particular company, again based on the experiences of other businesses in 'similar' circumstances.

A critique of PIMS

Clearly, it could be argued that a database operating on information gathered in the period 1970 - 1983 is outdated. However data continues to be collected from participating companies and PIMS argues that it provides a unique source of time-series data, the conclusions from which have proven to be very stable over time.

It has also been suggested that PIMS is too heavily biased towards traditional, metal-bashing industries, such as car manufacturing; perhaps not surprising, considering the era in which the majority of the surveys were carried out. In reality, as of 2006, the 3,800+ businesses contained within the database includes data from the consumer, industrial and service sectors.

It is also heavily weighted towards large companies, at the expense of small entrepreneurial firms. This resulted from the data collection method used. Generally only larger firms are prepared to pay the consulting fee, provide the survey data, and in return have access to the database in which they can compare their business with other large businesses or SBUs. Mintzberg (1998) claims that because the database is dominated by large established firms, it is more suitable as a technique for assessing the state of "being there rather than getting there". (page 99)

A serious theoretical criticism has also been mentioned. An empirical correlation does not necessarily imply causation. There is no way of knowing whether high market share caused the high profitability, or whether high profitability caused the high market share. Or even more likely, a spurious factor such as product quality could have caused both high profitability and high market share.

Tellis and Golder (1996) claim that PIMS defines markets too narrowly. Respondents described their market very narrowly to give the appearance of high market share. They believe that his self reporting bias makes the conclusions suspect. They are also concerned that no defunct companies were included, leading to "survivor bias".

ee also

* Strategic management
* Marketing strategies
* Business model

References

* Buzzell, R. and Gale, B. (1987) "The PIMS Principles: Linking Strategy to Performance", Free Press, New York, 1987.
* Mintzberg, H. Ahlstrand, B. and Lampel, J. (1998) "Strategy Safari: A guided tour through the wilds of strategic management", The Free Press, New York, 1998.
* Schoeffler, S. Buzzell, R. and Heany, D. (1974) "Impact of Strategic Planning on Profit Performance", "Harvard Business Review", March-April, 1974.
* Tellis, G. and Golder, P. (1996) "First to Market, First to Tail: The Real causes of enduring market leadership", Sloan Management Review, vol. 37, no. 2, 1996.
* Ceccarelli, P. and Roberts, K. (2002) "I nuovi principi PIMS: la gestione dell'impatto sul profitto", Sperling & Kupfer, Milano, 2002.